In this post, I will explore arguably the biggest new idea in poverty-reduction
– microfinance – which has received considerable attention, investment and
scrutiny in the past few years as it expands across the globe. I would like to
evaluate the impact and overall philosophy of microfinance using Easterly’s straightforward
approach. I will discuss how the burgeoning microfinance movement has both
searching and planning implications, showing why Easterly’s dualistic view of
development programs may be overly simplistic.
In one of his anecdotal snapshots, Easterly seems to endorse the
microfinance movement, insofar as it was conceived by Mohammad Yunus in true Searcher
fashion. Yunus identified a very specific, homegrown need, and went about
formulating a way that local lending markets could fulfill that need. Since
this need – financial access to micro-loans to smooth income and consumption -
is arguably universal amongst the world’s poor, we have seen somewhat of a microfinance
revolution across the world since its humble inception in rural Bangladesh. This
expansion beyond its specific context, coupled with some concerns over its
measurable impact, would likely cause Easterly to soften his praise.
Microfinance is very much a bottom-up approach that helps poor
people help themselves. Shifting the approach from large macro-inputs to a very
real, micro level about money (in the form of micro-loans) that can actually be
translated into really “outputs” such as education, health, increased income
from businesses, etc. It is not a Big Plan instituted across the board with
cookie-cutter policies; rather it tends to vary with each context, and it is
local individuals taking on the risk. However, as it grows in scale, it is ever
in danger of becoming more streamlined, and seen as a necessary part of the
overall development package through the belief that access to financial
instruments (such as bank-operated savings and loans) is a fundamental need
that must be filled in order for people to pull themselves out of poverty.
It has clearly brought about some positive results, particularly
the empowering and women and a paradigm-shifting realization that poor people
are “bankable” and are not a huge credit risk (they have shown very impressive
levels of repayment). However, in order to pass Easterly’s development muster, programs
must stand up to rigorous statistical evaluation and be specifically aimed at a
need within a small, specific context. A study by Jonathan Morduch, the modern
superstar of microfinance impact, of the flagship microfinance programs from the
Grameen bank in Bangladesh shows that households with access to micro-loans do
not have higher consumption levels than others, and their children are no more
likely to be in school. Experiments showed that
microcredit only nudged up the rate of new business-formation from 5% of
households to 7%. Microloans are most often used for something else, such as
financing the purchase of consumer durables or repaying debts to moneylenders. From
an anecdotal perspective, I can say that I certainly saw that “dark side” of
Microfinance through my fieldwork in Peru, a hot bed for microfinance. These
poor, undereducated Peruvians were no better at handling constant, excessive
debt than your average American. The proliferation of easy credit to those who are
truly under qualified is more dangerous than no credit at all. This is not just
a truism for the developing world, look no further than the sup-prime mortgage
crisis to see how aggressive banks can prey on those searching for credit that
is cheap and seems too good to be true (see link to below to Strangio’s
critique of microfinance). I certainly believe that microfinance has created an
artificially high demand for credit in poor populations, using promotions and
interest rates to lure poor people into dangerous levels of debt.
One might expect, however, that microfinance banks would not have
the same profit-motive as the greedy mortgage-banks in America, and this leads
us to one of the biggest debates in microfinance today, should MFI’s be profit-seeking or should they operate from donations
alone?
Many believe that profit is essential for the sustainability of
these institutions. However, there are some very valid concerns over the expansion
of the microfinance sector. Easterly might argue that this effort to make a
large, formal sector of banks that serve poor customers is too much of a Big
Plan based on some vague ideal about the universal access to credit, savings,
insurance for all. Certainly, the expansion of these banks to new “unbanked”
areas and populations would require a large influx of foreign
investment/aid/donations to fund these banks. Bill and Melinda Gates have
already given millions to initiatives that support microfinance (I have
actually been the beneficiary of some of these funds myself). However, it is important
to consider what might happen if they banks expand without the proper
government regulations and oversight, particularly given that their customers
are particularly vulnerable. If the US
has trouble regulating its banks, one could imagine these issues would be even
worse in the third world. Also, giving loans to poor people to help them
achieve their goals is noble, but the unfortunate reality is that they need the
training and education to learn how to pay it back responsibly and there will
always be banks looking for an opportunity to take advantage of that need in
the market.
Easterly has written a little bit about microfinance, remarking
that it tends to be overhyped and that it achieves the best results in 1) small
scale application and 2) specific contexts. He is wary of it being converted
into a Big Plan with excessive targets and goals that it cannot truly meet. However,
it would seem that his love for markets, as ultimate conduits of feedback and
coordination, might sway him to support the unleashing of MFI’s so long as
their services are ultimately provided positive outcomes for the world’s poor.
Microfinance is one of the few things that Sachs and Easterly
agree on, and this is perhaps because both of their approaches have become overly
dogmatic. Microfinance has its origins in a grassroots Searching approach, yet
is sits precariously on the edge of a mainstream Planning takeover that would
greatly spread it to all the unbanked corners of the developing world (as wells
as poor areas within developed countries). Therefore, to beast reap the
benefits and minimize the costs of microfinance, some important reforms must be
put in place before it is unequivocally embraced and codified like the rest of
the Millennium Development goals. Based on the debates, we should at minimum
assess the following:
1. More rigorous impact evaluations to see what works in different
environments.
2. Avoid the pitfalls of Planning approach, such as a target of
making every rural village “banked” by a certain year, also be wary of
streamlined MFI’s and practices across different countries and regions.
3. Come to consensus on the profit-motive of MFI’s, understand the
crucial role of regulations/oversight in the feasibility of this option
Sources:
Murdoch’s Impact Study:
Easterly on Microfinance:
Strangio on Microfinance Shortcomings:
http://www.tnr.com/article/world/98499/microfinance-drive-poverty#
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